Saudis Hold Back Oil

(With thanks and a nod to The Oil Drum)

The Kingdom of Saudi Arabia has just made an announcement that changes the Peak Oil scenario, and not for the better. I’ll quote from an article in the Financial Times yesterday:

In a recent interview with Argus, an industry newsletter, Ali Naimi, Saudi Arabia’s energy minister, made clear Saudi Arabia had “no plans" to embark on its next phase of expansion. “We are idling at around 9m bpd and we will reach capacity of 12.5m bpd by 2009.”

King Abdullah of Saudi Arabia concurred. Quoting from the same article:

King Abdullah, reported by the official news agency this month, said: “I keep no secret from you that when there were some new finds, I told them: ‘No, leave it in the ground, with grace from God, our children need it’.”

A brief refresher on peak oil: The oil production in any geographic region (A state, an oil field, a country, the world) tends to start low, then ramp up steeply to a peak production rate. It can plateau for a time, and then irreversibly declines. The peak generally occurs when about half the recoverable oil has been extracted. The world hit a temporary peak in crude and condensate production (“C+C” in industry parlance, which is what actually comes out of oil wells) in May of 2005 at 74.3 million barrels per day (mbpd). Pushing three years later, the world just exceeded that figure by 168,000 bpd, or 0.22%. Pseudo-crude from tar sands in Canada was included in this latest figure, so to some (including this observer) the 2005 peak still stands. As I have written elsewhere, we are on the bumpy plateau of peak oil, waiting for the inevitable decline.

Despite the recent shakes in the U.S. economy and a sense of financial insecurity worldwide, the demand for oil continues to grow. The Saudis are the top producer of crude oil in the world, and for them to look at world demand and say, “Mmmmm…nah,” is a big deal. It is the beginning of what some call the prudential model of oil production.

Ever since the oil embargo in the 1970’s, Saudi Arabia has been relatively cooperative with the West on the subject of oil production. The Kingdom has been cozy with U.S. presidents and has ramped up both production capacity and exports as fast as technically possible. Now we have a situation where the rulers of the world’s premier oil state are making a very public self-interested judgement call about how much oil to export. It marks both a change in Saudi policy and a subtle but seismic change in the power balance between the U.S. and Saudi Arabia.

Some contend that it is not a voluntary change in policy. The largest Saudi oil field, Ghawar, may well be in decline, to such an extent that increases in Saudi production are impossible. See the full technical analysis at The Oil Drum. In that case, the statements about prudential production are just a smokescreen to preserve the illusion that Saudi Arabia can manipulate world output. The political influence of the Saudis rests partly upon that impression.

Whether the Saudis are earnest or bluffing, this represents a loss of power. One scenario is a loss of power by the U.S. and Europe to influence OPEC oil policy. The other is a loss of ability by the human species in general (and the Saudis in particular) to extract oil from the earth at ever increasing rates. Either way, it is yet another signal for us to accelerate our adaptation to a world of declining energy supply.